Haddock, Price, and Farina

College Accounting: A Contemporary Approach, 4e

2-6. The Balance Sheet shows assets, liabilities, and owner’s equity on a given date.

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Chapter Opener: Thinking Critically

At the beginning of the chapter, there is a short paragraph about Southwest Airlines. Let’s read this together. . .

Ask students “How does Southwest keep track of all of these transactions so that it can continue to run its airline profitability?”

Answer--- The individuals in charge of keeping track of these transactions at Southwest as well as in other companies, are known as accountants. When recording the transactions, accountants are required to follow a set of rules and regulations known as GAAP. For every financial transaction that Southwest has, their accountants determine the accounts that were affected and then they record, report, and then analyze these transactions. By doing so they can, at a specific point in time and over a stipulated period, be able to assess the company’s financial performance including profitability of the airline, assets owned by the company, and of course the amount owed to creditors and owners.

Section 1. PROPERTY AND FINANCIAL INTEREST

Beginning with Analysis

Ask students, “What happens when you buy a pair of jeans and pay cash?”---The total cost of jeans they own increases, and the amount of cash they have decreases.

Ask students, “What happens when you buy a pair of jeans with your credit card?”—The total they own increases, and the amount of money they owe increases.

• Point out that most business transactions have at least two effects.

Objective 2-1

♦ Starting a Business

• Explain that the equation, property = financial interest, is the basis for transaction analysis.

♦ DESCRIBE THESE ANALYSIS STEPS:

1. Explain to students that analysis (determining whether a financial event, like a purchase, sale, payment, or receipt is a business transaction) is the first step of the recording process.

2. The equation must always be in balance.

♦ Purchasing Equipment for Cash

• Remind students that, when recording the effects of transactions in equation form, the value of property acquired by a business is offset by any claim against the property (rights to proceeds from a sale of property).

• Emphasize that a claim is never asset specific. That is, assets are thought of as being a pool of items.

♦ Purchasing Equipment on Credit

• Define Accounts Payable. (Amounts that a business must pay in the future.)

• Explain that purchasing an asset on credit:

1. Increases the asset—the Property side of the equation.

2. Increases the amount owed by the business—the Financial Interest side of the equation.

• Point out that the equation must always remain in balance.

♦ Purchasing Supplies

• Explain that this transaction :

1. Increases the asset, Supplies.

2. Decreases the asset, Cash.

• Point out that the equation remains in balance.

♦ Paying A Creditor

• Explain that paying a creditor involves:

1. A decrease in the amount owed by the business—the Financial interest side of the equation.

2. A decrease in cash—the Property side of the equation.

• Point out that the equation remains in balance.

♦ Renting Facilities

• Point out that the rent in this transaction is paid in advance.

• Explain that the right to occupy the facility is considered a form of property.

• Explain that this transaction:

1. Increases the asset, Prepaid Rent.

2. Decreases the asset, Cash.

• Point out that the equation remains in balance.

Objective 2-2

Assets, Liabilities, and Owner’s Equity

Say to your students, “Suppose you want to establish a Catering Service business. What items will you need to start the business?” --List these on the board.

Then ask students, “How will you acquire these items?” List the responses on the board.

♦ Explain to students that everything listed will be categorized as an asset or a liability. The difference is owner’s equity.

♦ Have students categorize the items.

Objective 2-3